How much do you really pay for a loan?

What goes into the cost of a loan? The amount you borrow isn’t all you have to pay back.

Let’s break it down and work through an example.

The four basics

1. Principal
The amount of money you need to borrow

2. Origination fee
The cost of processing your loan, typically 1%–10% of your principal

3. Interest rate
The amount a lender charges a borrower; a percentage of the principal

4. Loan term
The amount of time you have to pay back your loan

Example

Let’s say you take out a $500 loan with an 8% origination fee, an interest rate of 20.44%, and a loan term of 12 months (payments made every 2 weeks):

Principal:
$500
Origination fee (8%):
$40
Interest (20.44%):
$59.51
Subtotal (repayment amount):
$599.51
$599.51

without any extras or penalty fees

Tip: With most personal loans, interest is calculated daily. That means paying off your loan early can save you money.

Annual percentage rate (APR)

APRs are the best way to compare the cost of loans when looking for the lowest price.

When APRs are calculated, they include both the interest and fees paid over the life of the loan.

35.95%

Your APR on this example

Your loan term has a significant impact on your APR.

As a separate example, let’s say you borrow $100 and have to repay $101. Here’s how the APR changes depending on the amount of time it takes to pay off the loan.

1 Year
1% APR
1 Month
12% APR
1 Week
52% APR
1 Day
365% APR

Tip: Always make sure that the loan terms are similar when comparing loan offers—otherwise, APRs aren’t as helpful in finding the lowest price.

The extras

Some lenders may charge additional fees or offer promotional products, such as:

  • Prepaid debit card fees
  • Credit insurance
  • Rollover fees

Tip: Some charges included in your loan might be optional. Make sure to ask your lender about any charges you don’t understand.

Example

If your $500 loan includes credit insurance for 1% per month, that’s an extra $60 over the life of your 12–month term.

Subtotal:
$599.51
Credit insurance:
$60
New total:
$659.51

Penalty fees

Lastly, there are penalty fees. These vary from lender to lender and are charged based on your payment activity.

Your lender might charge you $35 for your late payment and insufficient funds, and you also could be charged a prepayment penalty (yes, that’s a thing).

Example

Let’s say that you’re late on a payment, your bank account has insufficient funds, and you received a bonus and paid off the loan early:

Subtotal plus credit insurance:
$659.51
Late payment fee:
$35
Insufficient funds fee:
$35
Prepayment fee:
$35
New total:
$764.51

What will you end up paying for your loan

The short answer: it depends. The amount you pay depends on how much you borrow, the rates you get, your loan terms, and your payment activity.

Example

In this example, you paid $264 in interest, fees, and extras to borrow $500 over 12 months with a 35.95% APR.

Principal:
$500
Origination fee:
$40
Interest:
$59.51
Credit insurance:
$60
Late payment fee:
$35
Insufficient funds fee:
$35
Prepayment fee:
$35
New total:
$764.51
$764.51

Total cost of the loan

Did you know? A loan can help you establish the credit history you need to get better rates in the future. Make sure your lender reports your payment activity to the national credit bureaus so that you can build your credit scores as you make your payments on time and in full.

This information is for educational purposes only and should not be relied upon as legal, tax, or financial advice, or to indicate the availability or suitability of any Oportun product or service to your unique circumstances. Contact your independent financial advisor for advice on your personal situation.

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